Is Your Business Just a High-Paying Job You Can't Sell?

Sean Weisbrot: Cameron Bishop is the managing director of Raincatcher, a company that helps companies get acquired. In this conversation we talk about, I. The craziest things he's seen when people have tried to sell their business. Reasons why businesses don't sell, reasons why businesses want to sell, how long it takes to actually get a sale done, and so much more. So if you're thinking about selling your business or you're running a business that you may want to sell at any time in the future, you need to know this information. Let's get to it right away. What's the craziest thing that you've seen in your career related to exiting

Cameron Bishop: quite a few years ago, I was working for a large company at that time, and we acquired a business in New York City from a very creative and talented and fairly eccentric lady. And, um, it's a, it's a kind of a known fact that a lot of people, once they sell their company, they really wonder why they sold their company. Uh, they become risk averse and. Most buyers require them to stay on board at sub capacity, whether it's as an employer or a consultant, uh, for a transition period for knowledge exchange and risk mitigation for the buyer. In this case, we had this lady on a consulting agreement. She had been, it was a fairly small company. It was about a 7 million, $8 million deal. She, uh, stayed on to do kind of transition work and make sure things were gonna go smoothly. We actually, uh, the lady who was her number two, we promoted to the top job, uh, in that division. And, uh, it was apparent that in this case, at least, uh, the seller of the company had, was kind of struggling with the fact that now she was reporting. To somebody who used to report to her. In addition, uh, it was a very creative workforce and a lot of the employees became sort of, uh, dissatisfied that, uh, they knew the owner made a lot of money and she didn't share any of it with them. So the combination of that fact coupled with a now reported to somebody else, they sort of began to cut the odor out of the picture and, uh, she became increasingly dissatisfied with that. Uh, the bigger company we came in, we introduced all kinds of, you know, general disciplines, proper accounting, et cetera, and she just became further and further ated. So one morning I got a panic phone call from my new manager in that division that the former owner had come in with a weekend take. This is a true story, taking chains and padlocks and locked up and took every file cabinet in the company hostage. So I literally had to, uh, go through a proverbial, uh, talk somebody down off the ledge of a tall building, uh, to get her to release the cabinets. And from that point on, she had completely alienated herself with every employee in the company, which only exacerbated her problems. So we had to go through a very, very kind of rancorous negotiation to buy her out and get her out of the building 'cause she was just destroying morale of that division. So that's, that's a fairly unusual case of, uh, of, uh, acquisition transition work.

Sean Weisbrot: I guess that's a little bit less common nowadays when people are remote. There's not really buildings to walk into and steal files from.

Cameron Bishop: Well, that's the case that also, uh, we're far more digital today, so that wouldn't be, uh, near the issue if there are even any file cabinets at all.

Sean Weisbrot: What else have you seen that. Is something that would cause someone to not get the deal done. The first

Cameron Bishop: thing we see most frequently, uh, is that uh, when someone calls us and they want to say, Hey, it's time for me to sell my company. My kids don't wanna buy the business, they don't want to be in the business, and it's time for me to get out. Um, the first thing we see that is gonna make the company unsellable or. Take a really long time. 'cause they have terrible accounting. If they have any accounting at all. It's amazing, uh, how large a company can be. And they don't do any budgeting. They don't do any regular monthly, uh, financial reporting. They essentially do what's called checkbook accounting, where they look at their checkbook. If they've got enough cash in there, then they pay their bills. And that's, uh, frequently I did a, a, uh, turnaround on a $60 million 5 0 1 C3 that made $5 million a year for the charity. And, uh, they really had no idea what their, uh, cashflow was, what their forecasting was. They'd never set a budget in 30 years. So that's a fairly common thing. The second thing that we see most frequently is a business where. The company is either completely or almost solely dependent on the owner of that company for its ongoing operations and success. And, uh, most times those companies don't get sold. Or if they do, the buyer's gonna require the owner to stay on board for probably an extended period of time, which is counter to why they're selling the company to begin with.

Sean Weisbrot: I go back and forth trying to think about businesses that I would want to do that could be scalable, but not need me. And I find that the things that I'm the best at require me. So I struggle because there's a disconnect between what I wanna do and what I'm good at.

Cameron Bishop: It's one of the, uh, the differentiators there. So for you with your, uh, uh, extremely fascinating background and skillset that it, it's a question of whether you want to create. A sustainable, ongoing business that, uh, can run perfectly well and successfully if you're, uh, taking a 30 day trek around the world, or if you want a business where you can quite often make substantial amounts of money, but that it's dependent either solely on you or nearly so, and we refer to that as a lifestyle business and we see a lot of owners, uh. Come to us, uh, try to sell a lifestyle business. And a lot of 'em are making a lot of money. Money, some in the seven figures, but it's not transferable. Uh, we see that with a lot of consultants. Uh, for example, I spent five years as a partner in a consulting firm, uh, and I had a pretty successful practice working with business owners on exited transition planning, but that was solely dependent on my knowledge. And there was nothing there to sell. Uh, we see that in some cases with some lawyers, uh, creative individuals, whether they're artists, writers, uh, some folks bald, you know, in media for example, uh, it's a great, they can make a great living, but they don't have. Anything that has, uh, exit enterprise value,

Sean Weisbrot: do you think people could use AI to kind of remove themselves from these lifestyle businesses?

Cameron Bishop: Uh, wow. That one's probably above my skillset. Uh, I think probably those with the speed AI is moving, that'll certainly be the case. But the question would be if those people are gonna need it, be needed in those kind of jobs at all, or if a AI will just take care of it instead.

Sean Weisbrot: So I'll give you a specific example I've been thinking about. There's this AI that was released by Sesame called Maya there, and there's a counterpart to it called Miles. So one is a feminine voice, one is a masculine voice. They're aware of each other, but they don't communicate with each other, which I find is fascinating. I've talked a lot with Maya. I'm actually thinking of interviewing her and releasing it as a podcast just because the capability is so incredible. She's like a therapist and a business consultant and all sorts of like really incredible things. Uh, based on the conversations that she's had with all of the other humans that interact with her instances, all of the information gets sent back to her core model so that the core model can learn and then allows all of the conversations to kind of get better over time. It's fascinating and they've just open sourced the, uh, the base model called Gemma. And I was thinking of having a business where I am kinda like a CEO whisperer. Basically. CEOs will have a problem hiring me as an advisor, but they also wouldn't hire me as a therapist. And so there's kind of this thing in the middle where like they're kind of, I think a lot of, I. Of CEOs are lonely and at the top basically that is the problem. They don't have anyone they can talk to. They can't tell their spouses if they have one. They can't tell their, their clients, they can't tell their employees, they can't tell their executives. So all of the things that they're, they have in their mind is battle bottled up. There's no, no really no place to go. So I thought maybe I could be this person that talks to them, lets them have this friendly ear, but then also have the ability to give them advice if they're willing to take it. Things like that. Um, and with my degree in psychology, also be able to help them with their mindset. I. But this isn't scalable, as you said. This is a lifestyle business. If I work my ass off 10 hours a day, five days a week, I could make half a million to 2 million a year. Um, but I'll be exhausted from talking or listening for 10 hours a day. The only way to really get past that is to employ an AI that has my voice and my knowledge to be able to, to interact with tons of different people at the same time for a lower price. Um, and so I was thinking about that, you know, being something to start where I build up cash by doing it myself, and then use that to take this open source model of this incredible AI and kind of build on top of it to be something that I could use to sell the service at a lower price point or to be able to scale the business and remove myself from the actual, uh, providing of the service. 'cause you can't really find other humans to replicate your knowledge and experience in exactly the right way, but I think you can with ai. So that's an example of something I've been thinking about. I

Cameron Bishop: think there's tremendous potential for that. You know, it's a, it is a true, uh, and valued career path to be an executive coach for the exact reasons you just talked about. Something I experienced for many years running companies. It is truly lowing at the top. And you're right, when you have challenging issues, uh, you can't talk to your spouse about it because he or she is too, uh, you know, too emotionally invested and biased. You can't talk to another senior manager 'cause they may have their own. Interest and they're somewhat, uh, myopic being inside the company. Most of your friends aren't, uh, or at least mine weren't, weren't, uh, necessarily business savvy like that. They could offer you advice and they wouldn't have full context anyway. So an outside coach who doesn't have, uh, any skin in the game, or a dog in the hunt, so to speak, that can provide some, uh, uh, perspective and advice. Uh, that's not biased is a valuable thing. There are, uh, already, uh, potential AI applications for what you're talking about, and it's only gonna get more sophisticated.

Sean Weisbrot: Do you think it's possible to sell that kind of a business? If I'm not doing the work myself, but rather the ai,

Cameron Bishop: I think right now it's probably gonna be more difficult, but I think over time as people come to understand and accept ai, I think that'll probably be, uh, a viable. Business path.

Sean Weisbrot: What should someone do if they wanna prepare their business to be sellable?

Cameron Bishop: Well, the best thing to do is not to just wake up one morning and say, that's it. I'm done. I'm selling. Because they usually need, uh, ideally they need a runway of, a minimum of a year, and two to three years is usually the case. As we talked about, there's a lot of issues around owner dependency. If they can identify and have a succession plan in place where they have a number two individual that they can make sure they're trained, they can step into their job, that's gonna make the company much more sellable if they work with accounting professionals in this day and age, you can hire a fractional CFO for very little money who has tremendous ROI for of in value creation for getting the accounting in shape. Many companies have, uh, one of the other key criteria that we see that's, uh, debilitating for company sales is customer concentration. If you have, uh, more than 20% of your business is dependent on one customer. That's, uh, for, for private equity buyers in particular, if the company's big enough to be acquired by a financial buyer, that's one of the first questions we get asked when they call us about a company we're representing. And they're automatically out if it's over 20%, or if they have two clients that maybe represent 40 or 50%, that's, uh, a tremendous risk factor for them. So if you can evolve the company, make sure you're maintaining your gross profit margins on a consistent basis, and hopefully the company is growing,

Sean Weisbrot: any smart founder is gonna wanna take cash off the table as often as possible. But when they do that, it lowers the, the numbers that they provide for accounting. Right? The profit margin is lower because the founder is taking money from the business. So should, is this something that's understood and like, don't worry about it? Or is this something that the founder has to. Be very careful to manage so that as they're approaching the sale date, they take less money so that the profit margins look higher. I mean, what is, what, how does that kind of thought of?

Cameron Bishop: We see a lot of business owners that don't really understand that. So the majority of companies in the US today, smaller companies in particular, are structured as either S corporations or LLCs. Being taxed as an ex s corporation. So, uh, the business owners, you generally take a market based salary. So if they're in an industry where this hypothetically, uh, $200,000 for the size of company and industry would be a, a normalized, uh, compensation for, uh, A CEO or owner of a company, then that's what they take. But at the end of the year. Because they're a pass through entity, they take a distribution for the remainder of what is considered the profit in the business. So that doesn't really impact their income statement or delete their profitability. Uh, where they run into problems is when they need to bring in a manager or promote someone to be their number two for succession planning purposes. They have to pay that individual more money. That by definition reduces the amount of profit available for a distribution to them at year end, which means effectively they are reinvesting in the business and reinvesting in their future in terms of what value creation and how sellable their business is. So the ROI in a longer term is much better for them. Uh, than it is, uh, to not make the investment in a succession plan.

Sean Weisbrot: Hey, just gimme 10 seconds of your time. I really appreciate you listening to the episode so far, and I hope you're loving it. And if you are, I would love to ask you to subscribe to the channel because what we do is a lot of work. And every week we bring you a new guest and a new story. And what we do requires so much love so that we can bring you something amazing. And every week we're trying really hard to get better guests. That have better stories and improve our ability to tell their stories. So your subscription lets the algorithm know that what we're doing is fantastic and no commitment. It's free to do. And if you don't like what we're doing later on, you can always unsubscribe. And either way, we would love a, like if you don't feel like subscribing at this time. Thank you very much and we'll take you back. Why make someone their number two? When they can make them number one, they could step back and lower their own salary, so then they have more cash to reinvest in the business.

Cameron Bishop: The first question we ask when somebody calls is saying, I want to sell my company, is we ask them, why do you wanna sell? Because that's a very important part of how we're gonna help them. And before COVID, the typical answers were what you'd suspect? Uh, I wanna play more golf. I. I wanna travel, I wanna spend time with my grandkids. Uh, my spouse has been I ill, I need to spend more time with him or her post COVID. We still do hear those, but far more frequently we hear I am. I'm just sick and tired of trying to hire people. I can't hire people. If I hire someone half the time they don't show up for the first day of the job, or they show up for a week and then they just disappear and ghost us and. Uh, we're back to square one again. I could grow my company. Pick your percentage. I've heard, you know, 5%, 10%, 20%, but I can't find enough people in order to do that. Then you couple that with, uh, you know, a lot of the other challenges with employees in the workforce today and risks of, of alienations and, and lawsuits, and they're just tired. Uh, so they wanna sell. And that's, uh, that's a big reason why, you know, they really need what, why they really want to get out. They, they just want to be done with it. It's not a case of they, they don't want the, uh, sort of back in the back of their minds knowledge that they still own this company. There's risk of something happening to it. They just kind of want the peace of mind and it change their lifestyle. We see quite often business owners if we present them. I sold a company about three months ago and we brought that owner, it was a very large, uh, construction company and, uh, we brought 'em four offers and they chose a, a lower priced offer because they actually wanted to continue to work in the business and they liked the buyer and a potential career path, and they walked away from. Three or four other offers that were anywhere from a million to, depending on what the earn out potential was, could have been $4 million more. But they made a lifestyle decision and kind of said, Hey, I'm gonna make so much money on this. What's another million or 2 million or 3 million? Not the decision I would've made or my partners on the job would've made, but it was our job to, to get a deal across the finish line for them and meet their requirements. So we see those kind of things, and that's why many of these owners don't do exactly what you ask. And that's just go out, hire a headhunter, find uh, find somebody to come in and run the company for them, pay them well, uh, maybe give 'em some equity in the business and walk away and take a distribution everywhere every year. But they, many times they just wanna be done with it.

Sean Weisbrot: What percentage of the people that come to you with this problem of I can't find the right person? Have actually engineered the problem by not offering someone something good enough.

Cameron Bishop: I would say that the vast majority of them, either A, have never considered that, or B, don't really know how to find someone. They don't know what they would actually want. And most business owners, you know, they've, they eat, sleep and breathe their company. It's their, it's their primary source of, of value, of vial validation. Uh, it's, it's their baby. A lot of 'em would have a very difficult time turning over their business to somebody else to run because it's, it's their baby and they know how they want it done, and they're not going to have a high tolerance level for somebody else doing some of the things they did in a different way and have it forbid if they did it better

Sean Weisbrot: and that's why they're in the position they're in because they can't trust other people.

Cameron Bishop: Very true. In many cases,

Sean Weisbrot: have. You heard anyone talk about automating workflows and processes in the process of preparing to sell so that they can cut down on staff to increase profitability?

Cameron Bishop: Business owners spend about 95% or more of their time working in the business and 5% or less of their time working on the business. So the, uh, introduction of things that you just described in terms of. Process improvements, efficiencies, et cetera. That's, that would occur when you're working on the business versus in the business. And, uh, a lot of times that requires additional investment. And unless they're really motivated to do so for other reasons, like they're seeing deteriorating, uh, profit margins because costs have risen faster than they could, uh, introduce price increases. They're forced to make some of those decisions. Uh, yeah, we don't see that a lot and it does vary some by industry as well. For example, when a in construction industry, uh, you know, you're dealing with, uh, hourly labor force, whether they're union or non-union is irrelevant. Uh, and you're still gonna have a lot of heavy equipment and machinery because it's essential to. Execute the work, uh, that's where your real costs are. So there's not a lot of efficiencies that can be extracted

Sean Weisbrot: there. What's the average length of a company existing before it gets sold from what you see

Cameron Bishop: in the range of 12 to 25 years? But we do see some second generation businesses, so, uh, well, the construction company I sold, I should say that was an 80-year-old company. We're selling a second generation company on the east coast right now, and that's, I believe, 50 or 60 years old. So we'll see some extremes either way, but I'd say probably a median or midpoint is probably in the 15 to 25 years. 'cause a lot of these business owners, you know, they started their company and they've. Lived it their whole life.

Sean Weisbrot: It's interesting because a lot of the people I talked to are in their twenties and thirties, and a lot of them wanna start a business that they could sell within two or three years. They kind of wanna just start that, start something, grow it as fast as possible, and then get rid of it, take the cash and go on and start another business. I think that's a generational difference, maybe.

Cameron Bishop: Well, uh, certainly that could be done. It, it depends on the kind of company it is and what the business or industry is. But in many cases, uh. If it's a, if it's a very technology sophisticated business, there's a good chance they might be able to do that because somebody wants to buy the technology more than the company. Or if they have a proprietary intellectual property, that can be the case. Or, uh, some kind of a really established, uh, brand that has VA in inherent value in and of itself, those could be the case, but, uh, for selling the typical company. Uh, especially if they've gained enough scale. Let's say they're making a million dollars in profit now, that changes the buyer profile for that kind of a business. And, uh, a lot of buyers, private equity in particular, they're very, uh, reticent to buy a two or 3-year-old company. They, in fact, uh, we recently sold a 5-year-old company, and that was a barrier to selling because. Buyers didn't see the company as being established long enough and at their current, uh, financial run rate, they couldn't look back two or three years, which is typical, and see consistency of that same scale of run rate that the company has when they're trying to sell. So in most markets, uh, two or three years is a disadvantage or the company's gonna sell at a discounted.

Sean Weisbrot: What businesses do you see, or what industry are they in? Where they sell pretty fast?

Cameron Bishop: Again, kind of tech related businesses. Uh, rain Kitcher, our firm, we sell a fair number of, uh, digital related companies, whether it's, uh, whether it's e-commerce or you know, digital marketing. But we've, I think we've probably sold at least a half a dozen. Kind of niche, specialized SaaS platform, uh, software companies. Uh, the fact that those have reoccurring revenue, uh, and very little fixed cost or capital expense requirements make them very attractive. They generally sell at a higher multiple, and there's just a tremendous number of these sort of niche focused, specialized SaaS platform companies that are industry specific. Then there are buyers that are acquiring or doing what are called roll-ups of those kinds of companies. Those are also, could be attractive depending on, uh, the financial size of the business for other, what are called search fund buyers, uh, who are out looking for a company to buy their individuals, and sometimes they have financial backing. That's an attractive market for somebody like that because many times those companies can be run virtually. So they don't have to relocate from wherever they live to wherever the business is.

Sean Weisbrot: What other things have I not asked about that you feel like I'm missing out on? Not knowing if, if I don't ask.

Cameron Bishop: Yeah. One of the other, one of the other key, uh, key drivers for business owners to look at besides we talked about their customer dependency. Uh, there's also a case of vendor dependency. So I had a Canadian client a couple of years ago. It was a fascinating business. Uh, it was a money machine. The guy was just printing money and he provided a service that required a specific and fairly unique product that was used in extremely large volumes, and there was only one provider of that product. And, uh, buyers looked at the business and said, wow, if. If this vendor for this product says, I'm not gonna sell to you anymore, or Jacks the price way up, uh, that's, that's a business that's got a very high risk factor. And virtually every interested buyer who was interested for every other reason about the company, uh, they walked away from it. And we eventually weren't able to get a buyer for that business for that very reason because of that. Singular dependency, uh, that one vendor. So that's another key criteria that business owners need to look at.

Sean Weisbrot: If the business was so successful, couldn't they have built out the technology to become their own vendor?

Cameron Bishop: It required a, an extremely specialized manufacturing process that would've taken millions and millions of dollars if they had the knowledge on how to manufacture it. To buy the equipment and set up an entire operation. So, yeah, that, for the size of this company, it wasn't a huge company, uh, but for an individual buyer or a small private equity deal, it would've been very attractive. But the, the math wouldn't have worked for them to try to set up their own operation to manufacture, uh, this raw material that the business required.

Sean Weisbrot: Couldn't they have gotten a loan to then acquire their vendor? So then they would just verbally integrate with themselves.

Cameron Bishop: That company, uh, was family owned and was a third generation business, uh, and they had zero interest in selling, nor did they have an interest in buying my clients. 'cause that was, my client was technically the different business they were in. They were a. Manufacturing company by client was a service company.

Sean Weisbrot: What I mean was the company that was trying to sell itself that had this dependence on the vendor, why didn't they buy the vendor? And then they just merged the two companies. So they provide their own raw materials and manufacturing for themselves.

Cameron Bishop: The manufacturing vendor was a third generation business, uh, that was infinitely larger than my client. Uh, my client had no knowledge how to run a company like that, and the, uh, the vendor had zero interest in selling

Sean Weisbrot: and the vendor wasn't interested in acquiring.

Cameron Bishop: No, they weren't. 'cause they saw, uh, my clients being in a completely different business than they were in. That business required the use of their product.

Sean Weisbrot: You, you win some, you lose some.

Cameron Bishop: Yeah. Well, that's, that's very true. But those are just, uh, some of the complicating factors we see in businesses.

Sean Weisbrot: What is one final piece of advice that you would give business owners that either they're thinking about selling now or they are selling is something that they would consider, even if it's in the far off future

Cameron Bishop: planning is key. And understand that, uh, selling a company is quite literally a full-time job on top of a full-time job. And a lot of business owners try to, uh, go it alone and handle their own transaction, and that is almost never, uh, ultimately in their best interest. It's gotta be in Pennywise and Pound foolish. Uh, we're happy to work with 'em in Rain Catcher, but my advice is to get. Professional, uh, representation when you're selling a company because there are a lot of complexities around that fact. Uh, things that get into, uh, working capital, for example, on the balance sheet that can easily make a difference of sometimes millions of dollars and what the effective purchase price for that company, uh, really is. So it's a complex process. Selling a company is nothing like selling. The product or service that they're offering to the market.